March 31, 2010
Reconciling the Joneses
The Seventh Circuit determined that under § 36(b)(1) of the Investment Company Act of 1940, “[a] fiduciary must make full disclosure and play no tricks but is not subject to a cap on compensation.” Jones v. Harris Assoc. L.P., 537 F.3d 728, 729 (7th Cir. 2008). The United State Supreme Court disagreed, unanimously stating: “By focusing almost entirely on the element of disclosure, the Seventh Circuit panel erred.”
The Supreme Court instead determined that even a disinterested board’s fee approval is subject to review in certain circumstances: “[A] fee may be excessive even if it was negotiated by a board in possession of all relevant information, but such a determination must be based on evidence that the fee ‘is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.” Jones v. Harris Assoc., L.P., slip op. at 15 (quoting Gartenberg).
I am inclined to agree with that the Seventh Circuit's view that market forces and disclosure should carry more weight than they are currently provided under Gartenberg. However, I also agree that disclosure, alone, is not sufficient under current law. Nonetheless, it seems to me that these cases could be reconciled, provided that under the Seventh Circuit’s standard, evidence that a fee "is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining” is evidence that a fiduciary is, in fact, “play[ing] tricks.”
March 31, 2010 | Permalink